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Italy’s Glimmer of Hope

The news coming out of last month’s elections for the European Parliament was deeply unsettling. Yes, voters delivered a well-deserved slapdown to the bureaucrats in Brussels. But they vented their dissatisfaction with the status quo by backing a motley array of nationalist, xenophobic, and outright fascist parties.

Often incorrectly lumped together as “right wing,” these parties are anything but pro-market, preferring a search for scapegoats — foreigners, immigrants, gays, Jews, Muslims, whoever — over reforms to the sclerotic European welfare state. For example, Marine Le Pen, leader of France’s National Front, believes there “are certain domains which are so vital to the well-being of citizens that they must at all costs be kept out of the private sector and the law of supply and demand” and supports government control of health care, education, transportation, and energy. In Denmark, the Danish People’s Party supports nationalized health care financed by taxation. In Hungary, the rabidly anti-Semitic Jobbik calls for the renationalization of strategically important companies. Greece’s neo-Nazi New Dawn opposes recent cuts in government spending and pensions.

Matteo Renzi has been reforming, and the European elections showed Italians are pleased.

For many of these parties, their economic policies, which as mentioned above are often almost an afterthought compared with nationalist and anti-immigration sentiments, have very little regard for free markets, and are instead an amalgamation of welfarist, protectionist, and statist ideas.

One interesting and surprising potential bright spot, however, was in Italy, where the Democratic party of Prime Minister Matteo Renzi won nearly 41 percent of the vote, the largest percentage of any party across the entirety of Europe. What’s particularly noteworthy about this showing is that it comes despite the fact that Renzi has shown himself willing to challenge the country’s welfare state in ways that are virtually unprecedented for modern Italian politics.

Italy has long been one of the economic basket cases of Europe. Its debt, including future unfunded pension liabilities, well exceeds 365 percent of its GDP. Total government revenue approaches 48 percent of GDP, coupled with widespread tax evasion, while spending tops 50 percent. Rigid labor laws have led to an unemployment rate of 12.6 percent. Youth unemployment is almost 42 percent. And the country lost more than 1,000 jobs per day over the past year. The economy has shrunk by almost 3 percent since 2012.

In February, Renzi, who was then mayor of Florence, staged a political coup, seizing control of the center-left Democrats and becoming Italy’s 62nd post-war prime minister. Since then, he has shown a willingness to take on many of the Italian government’s most sacred cows.

Renzi has cut more than €2.1 billion in spending from this year’s budget, including through a cap on government salaries. And he has announced even larger cuts for next year, as much as €14 billion, a bit less than 2 percent of total spending. While just a drop in the bucket, this still represents the biggest reduction in government spending since 1995.

And while most European governments have interpreted “austerity” as an excuse for higher taxes, Renzi has cut taxes by some €10 billion. He’s also begun reforming Italy’s labyrinthine business-tax code, cutting the regional business tax (IRAP) by 10 percent (although he weakened the impact by increasing some capital-gains taxes). He is also reportedly considering cuts to payroll and other business taxes.

Perhaps most important, Renzi has begun reforming Italy’s archaic labor regulations, which make it nearly impossible to fire employees. In March, he issued a decree to boost flexibility of entry into the labor market by allowing employers to hire as much as 20 percent of their workforce on short-term contracts of up to three years. He also announced the expansion of a separate apprenticeship scheme, which will allow companies to train more young entry-level workers without having to guarantee permanent jobs to those who complete the training. Both these reforms will give businesses far more leeway to hire and fire. Reports also suggest that he will attempt to move away from the practice of national wage negotiations, encouraging company-by-company negotiations instead. And he’s said that he hopes to offer tax incentives for companies that create jobs, particularly for young people, and to make it impossible for judges to order fired workers reinstated.

Renzi’s commitment to encouraging business growth extends to other areas as well. For example, he plans to open up domestic oil and gas development. Those plans had been blocked by the previous Berlusconi government. He also plans to consolidate and streamline the country’s myriad welfare and unemployment benefits in ways that are designed to incentivize work.

Oh, and he even has called for an end to public financing for political campaigns.

Of course, it’s important to keep Renzi’s reforms in perspective. While stunning by Italian standards, they remain far short of what will ultimately be needed to restore the foundering Italian economy to long-term stability. Many of his future plans remain more rhetoric than detail at this point. Opposition, in both parliament and the labor unions, can still block his more ambitious proposals. So far Renzi has not been willing to tackle the big pillars of the crumbling Italian welfare system, its pay-as-you-go pension system, and an inefficient government-run health-care program. He has a long, long way to go.

But the fact that an Italian prime minister has been willing to tell voters that the gravy train, if not exactly over, is at least slowing — and that voters responded affirmatively — is something to be applauded.

Renzi has shown that a positive message of growth and economic reform can trump both business as usual on one side of the debate and a bigoted search for enemies on the other. That’s a positive message for the rest of Europe — and for the United States as well.